What to Expect Next on Fiduciary Rule

NEW YORK – As the Labor Department's fiduciary proposal moves from the drawing board to the rulebook, advisors need to start preparing themselves for one of the biggest regulatory changes in years, experts say.

"For everyone in the industry, even if you are fee only, then this rule is going to affect your business in some way," Bonnie Treichel, an attorney at Retirement Law Group, told attendees at IMCA's Investment Consultants Conference.

Fellow panelist, Daniel Kleinman, an attorney at Morgan Lewis & Brockius, agreed, noting that the Labor Department's proposal expands the definition of who counts as a fiduciary and under what circumstances.

"Once you become a fiduciary, other rules apply. So it's a small change in terms of a wording but it has huge ramifications," Kleinman says.

The Labor Department first unveiled its proposed rule last April and it was subject to multiple comment periods and several days of hearings. The proposal would affect advisors and firms providing certain kinds of retirement advice, such as rollovers of IRAs. A revised version of the rule went to the White House's Office of Budget and Management for review last week.

The office has a minimum of 30 days and a maximum of 90 days to review the proposal, Treichel says. The OMB may ask questions of the Labor Department and ask for changes to make sure the rule complies with existing laws, but neither attorney expected too many radical changes."If you make too many changes to a proposed rule, then you have to go back and re-propose it," Kleinman says.

The OMB could make some changes to the final rule to make it easier to operate under, he explains. For example, they could allow for a longer implementation period once the rule is made effective. But he discounted the notion that they would make many substantive changes.

Many industry observers, pro-fiduciary advocates and critics expect that the Obama administration will make sure the rule is implemented this year, before another president takes office in 2017.

"We'll see it leave OMB then it will be published in the Federal Register. Then you'll have 60 days before it becomes effective. Doesn't mean that you have to immediately comply, but it will be effective," Treichel says.

Privately, some advisors with larger books of business say they don't believe it will impact them that much. Others, however, aren't sure what to make of it. Indeed, in the middle of the panel's discussion, one advisor from the audience stopped the panel's discussion mid-sentence by calling out and asking them to explain what their legal definitions meant in practical terms for him.

Given how close the Labor Department is to implementing a final rule, Treichel says all advisors should start getting ready now by brushing up on the details available and by examining their own books of business.

"Of course you can't implement technology solutions or other things until you see the final rule. But you can start analyzing your book of business and what communication strategies you currently use," Treichel says. "When you are thinking about that rollover business, you can make sure that you are current with the rules today. What disclosures should you have in there today? Make sure you are using those. There is a lot you can do today to make sure that you are proactively preparing for when the final rule."

Kleinman agrees and notes that while firm may have policies and procedures in place to comply with existing rules – policies and procedures many advisors are automatically relying upon without being aware of it – the fiduciary proposal will require a serious shift in the industry.

"It is the retail space that the Labor Department is addressing, especially with a big focus on IRAs. So what is your exposure to retirement advice? Do you give advice? Do you give holistic advice? Do you solicit rollovers? Do you have an active rollover business? Those are the questions you need to start thinking about and start asking your firms what they're prepared to do," he says.

And Kleinman, again noting that rule has not been finalized, observed that there will be an evolution in understanding the details and practical implementation even after the rule is made public.

"At the end of the day it will be a learning process for everyone," he says.